Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation launched on 15 August 2016 as part of the Making Tax Digital (“MTD”) project. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee are provided on the previous page.

We would be happy to discuss any aspect of our comments herein and to take part in any further consultations/initiatives in this area that there may be in the future. We wish to comment on some specific aspects of the current consultation. Our comments herein have been compiled from feedback received from our members via various channels over the course of the last few months.

Four cornerstones

This submission is founded on the basis of the following four key cornerstones:-

• Brexit – the UK’s planned exit from the European Union alone is cause for reconsideration of the MTD project timetable. The economic and wider implications of Brexit will be the focus of businesses large and small across the UK for many years to come.
• Digitisation of the tax system is a laudable long term objective – but only for those who are digitally capable. The process of digitisation of tax administration should not start with mandation
• Smaller businesses should be completely exempt – the administrative and cost burden of MTD is disproportionate and the exemptions proposed as part of this consultation are not realistic
• New businesses should be exempt from mandatory filing for a two year period – the UK should consider what further reliefs and exemptions could be offered to this taxpayer population

Digital transformation

Chartered Accountants Ireland is supportive of HMRC’s digital transformation and believes that if the UK tax system is to be both fit for purpose and the 21^st century, a “digital” approach should form part of the UK regime, but only where it is proportionate and only for those who are digitally enabled and choose to do so.

The mandation of digital record keeping and quarterly digital reporting will be of almost universal impact. We are yet to be convinced that this will reduce both the level of administrative burden on business (particularly the smallest businesses) and the level of error HMRC have previously cited as being one of the major drivers in quarterly mandation.

Whenever a new secure, user-friendly digital solution is introduced, it should attract willing users among businesses and individuals alike. In short, it should be voluntary to begin with. If a voluntary approach is adopted, those creating the new system face the invigorating challenge of making it attractive and easy for users.

To achieve this, they are likely to set more realistic goals, aiming initially at those most likely to become enthusiastic early adopters. An iterative approach can be used. By developing the system in this way, the developers can work to creating a natural following among others eager to experience the advantages they might otherwise miss. This would also focus attention on addressing HMRC service standards for taxpayers and businesses alike.

Digital transformation of the UK tax system should be a longer term objective developed in tandem with overall simplification of tax policy in the UK and should not be seen as a substitute for legislative simplification.

Agent Services project

The Agent Services project is just one example of the length of time taken to develop and launch digital services. This project formed part of the consultation “Establishing the future relationship between the tax agent community and HMRC”1 (better known as the Agent Strategy Consultation) which was launched in May 2011 with online services for agents at the heart of the consultation proposals. At the time of writing, over five years later, we are not aware of any of the digital solutions for agents having moved beyond private beta testing.

Exemptions

Exemption threshold

There is planned to be an exemption for the self-employed and people whose income is less than £10,000. This is below the current level of the personal allowance. So it appears that this exemption will only be for those who do not pay tax. It is also not clear to us why companies are not included within this exemption.

The current definition of those who will be required to submit quarterly information from the very outset will take in some of the smallest, least digitally aware taxpayers who will be most impacted by the changes and any problems which will inevitably ensue from such a major change. MTD presupposes that digital records are more accurate but the consultations have yet to make a strong case that records not maintained digitally are any less competent.

The current exemption level would include new businesses who would otherwise be obliged by MTD to notify HMRC within four months of starting a business and begin filing in the very early months of trading. In such cases, we fail to see the benefit, to the businesses or to HMRC, of submitting quarterly reports particularily as the information provided is likely to be very prone to fluctuation.

Those businesses with a turnover of just over £10,000 (and realistically with profits of far less than this amount) will be hardest hit if they are obliged to change their working practices by not only filing quarterly but keeping records digitally.

Many small businesses that currently employ a book-keeper/accountant once a year to prepare their accounts and tax return will find themselves having to employ that same person four times a year, in addition to maintaining digital records. There can be no doubt that this will prove very burdensome from both an administrative and cost perspective. In some cases, it could drive individuals out of self-employment and impact negatively on the very entrepreneurial behaviour which is so important to the UK economy.

A more realistic exemption would be for those with an income level of less than the VAT registration threshold (currently £83,000) to be exempted from the proposals. Such businesses should be allowed to remain exempt until such times as their income exceeds twice this threshold with more regular filing only required from the next tax year thereafter.

New businesses

We note from the consultation proposals that a new business would be required to make an initial assessment of whether their gross business income in the first year is likely to exceed the threshold. On this basis, quarterly returns would be expected from the very outset for some.

Expecting a new business to file quarterly is simply unfair and places an additional burden at a time when the business owners are very much engaged in and focused on getting the business off the ground. This seems to us to be punishing those with entrepreneurial spirit. We would propose that all new businesses would be exempt for a two year period unless turnover exceeds £500,000 in total over the course of those two years.

In Ireland for example, new self-employed businesses and companies are not required to make preliminary payments of tax in their first period of trading. For the first and second year of trading, new self-employed businesses have until the return filing date for the second year to submit tax returns. There are also a number of schemes and tax reliefs for new start-up businesses and companies. These measures all recognise that the focus of start-ups in the first few years is on getting the business off to a sound start. Crucially, these particular exemptions and reliefs do not have a negative impact on the level of tax compliance overall in Ireland.

Deferred implementation

The consultation proposes to defer mandatory MTD for the next tier of businesses and landlords with annual incomes above the exemption threshold. As outlined earlier we would propose that the exemption threshold be set at and move in line with the VAT registration threshold. Therefore the next tier of businesses with income above that threshold should be able to avail of deferred implementation so long as their turnover is less than twice the VAT registration threshold.

Charities and community amateur sports clubs

We agree that charities and community amateur sports clubs should be exempt from the requirement to maintain digital records and update HMRC quarterly. Trading subsidiaries of charities should also be exempted as these are, in effect, an extension of the main charity with many either gift aiding or paying up by dividend any profits earned.

Complexity

For those businesses and landlords not required to report quarterly under MTD, the existing self-assessment regime will be maintained. This will add an additional layer of complexity to the UK regime as HMRC will be required to run two very different systems in parallel.

In addition, a self-employed person will still be required to complete a self-assessment return for their other sources of income. For a self-employed individual with property income, other taxable income sources and a partnership share, this would mean potentially up to 16 returns of information required to be submitted annually (four quarterly returns each for their self-employment, property income and partnership share, followed by three end of year submissions and a self-assessment return).

The level of potential complexity is simply staggering. It is difficult to envisage how exactly this would reduce the £6.5 billion of errors HMRC have previously cited as being a major driver in mandating quarterly filing and digital record keeping for business.

Office of Tax Simplification

The Office of Tax Simplification (OTS) has recently been placed on a statutory footing. As a result there seems to us to be an opportunity to avail of the talents and skills of the OTS to review the current self-assessment and UK tax regime and identify recommendations for simplification and opportunities to leverage the use of digital means within the tax system before making the massive leap that mandatory MTD represents.

MTD software

The proposal that free digital tools will be available for the smallest businesses with the simplest affairs is welcome. However we say this very much as an initial view as it remains unclear what exactly will be available, for whom, for what types/levels of income and for how long the software will be free. What is clear is that the software industry, the government and the small business sector will have different, and competing, objectives in defining and developing these parameters.

For some businesses, the free packages on offer may not be sufficient to replicate the paper-based accounting that they use currently. This will inevitably force many into buying a bespoke package including, for some, their first computer system.

Granting third party software providers access to confidential personal and business records also raises issues of security, privacy and confidentiality for businesses who will inevitably be required to use these services as HMRC does not intend to develop its own software.

Financial support

The consultation document asks what level of financial support might be reasonable for the government to provide towards investing in new IT, software or training, to whom should such support be aimed, and what is the most appropriate form for delivering such support.

We believed than an enhanced form of tax relief could be considered similar to how relief works for SMEs claiming for qualifying costs under the research and development (“R&D”) tax relief regime. Expenditure on new IT, software and training up to a level of say £20,000 could qualify for an immediate 100% deduction with a further 130% deduction available to reduce taxable profits.

The Government could additionally consider introducing a payable tax credit similar to that available under the R&D tax relief regime for SMEs with surrenderable losses. This would enable a payable tax credit to be claimed by businesses qualifying for the relief and would provide a welcome cash flow boost to many.

The 100% relief could be made available to all businesses irrespective of size with the additional 130% deduction solely available to the next tranche of businesses for whom MTD is to be deferred for a year initially (see our earlier comments). For those businesses, the additional 130% relief would only be available for relevant costs incurred in that year only to encourage them to prepare for the transition to MTD in advance.

Digital record keeping and format of quarterly reports

The detail of the consultation makes clear that the new requirement for digital record keeping and reporting is far more than simply entering a handful of totals (which could come easily from paper or an excel spreadsheet) into an online VAT return. This amounts to mandatory record keeping at transaction level; far beyond the current legislative record keeping requirements. This seems to go against the consultation which at part 3.6 states that “These legal requirements will remain broadly unchanged and no additional records will need to be kept”.

This amounts to prescription by HMRC, for the first time, of a particular form in which accounting and financial records must be maintained. This goes beyond HMRC’s Your Charter which asks taxpayers “to keep accurate financial records” but which does not prescribe their format.

We believe this is a step too far, too soon. HMRC have cited digital record keeping as being more accurate but have yet to provide evidence that this is the case in reality. Often, digital records are only as accurate as the person maintaining them. On that basis, we fail to understand the rational for mandating digital record keeping. For VAT registered businesses, HMRC already receive quarterly summary totals. This, coupled with employment information derived from PAYE real time, could be used to draw the various strands together of business information on a more regular basis.

Administrative Burdens Advisory Board

In its 2016 report2, the Administrative Burdens Advisory Board (“ABAB”) expressed its disappointment with the announcement to mandate digital record keeping and quarterly online reporting for even the smallest businesses. They expressed concerns that the proposals for quarterly updates will be more burdensome than they currently are with increased record keeping and compliance costs. “This will have a big impact on the smallest of businesses”, they said.

The requirement that as part of the reforms all businesses will have to keep records digitally is a significant concern, given the timescales to educate businesses and provide the necessary tools for them. The ABAB also have reservations around the current capability of software being able to deliver HMRC’s vision and the appetite amongst small businesses to utilise them. The ABAB urged HMRC to explore this further urgently. We would echo all of those comments.

Filing quarterly and maintaining records digitally will inevitably lead to a significant increase in compliance costs and burden. Less than two months before draft legislation is expected on MTD, a realistic impact assessment has yet to be published addressing these concerns.

“End of year” activity

We agree that “end of year” activity should be a stand-alone process, as outlined in the consultation document. The consultation proposes a nine month deadline for completing end of year activity. This is in effect a month less than the ten month period taxpayers currently have to submit their self-assessment return online after the end of the tax year.

Changing the deadline by a month is simply not practical for those businesses with a 31 March/5 April year end. Nine months forward from that is 31 December when many businesses are closed for the Christmas period. We believe the current ten month deadline should be maintained.

Conclusion

Consultation period

The consultation period for MTD closes on 7 November 2016. Having originally been due to launch in spring 2016, the consultation launch was delayed by a number of months due to the EU referendum purdah, amongst other factors.

We understand that after the consultation closure date, HM Revenue & Customs has been tasked by the Chancellor of the Exchequer with bringing forward legislation on MTD in Finance Bill 20173. Draft clauses for Finance Bill 2017 are due to be published on 5 December 2016 with consultation on the draft clauses open until 31 January 20174.

Given the length of the various consultation papers and the complexity of the various inter-related issues as part of this project, it is highly likely that many submissions in respect of the consultations will not be received much earlier than the closing date. That leaves less than a month for responses to be considered by HMRC before the Autumn Statement on Wednesday 23 November and publication of the draft legislative clauses thereafter.

It seems to us that there is insufficient time for further development and consideration of the proposals between the end of the consultation period and the date for publication of draft Finance Bill clauses.

According to the MTD roadmap, the first self-employed businesses required to report quarterly on a mandatory basis are due to begin doing so from April 2018, a mere 16 months away.

The changes proposed will mean the biggest changes to the administration of the UK tax system since the introduction of self-assessment in the late 1990s. As such, close, considered and meaningful consultation is crucial.

HMRC did initially consult with stakeholders before the issue of the consultations in August, however the detailed proposals were not known at that point. Therefore we do not believe that three months is sufficient given the impact, scale and quantum of the changes planned.

The premis of MTD is built on robust, well tested, secure software that links to HMRC’s system via APIs. We are concerned that there simply is not enough time to allow the software to be developed and properly tested and the impact on businesses to be fully assessed.

Impact of Brexit

Following the announcement at the 2016 Conservative Party Conference that the government will trigger Article 50 by the end of March 2017, it is clear already that UK businesses are facing a period of prolonged economic uncertainty. To heap the MTD proposals on top of the economic uncertainty faced by many businesses would be foolish and potentially damaging to the UK economy.

For this and the aforementioned reasons, it would seem sensible to us to delay the implementation of MTD. The one year exemption proposed for the next tier of businesses (still to be defined) is simply not sufficient.

Pilot programme

MTD should be run initially as a voluntary pilot programme similar to the pilot programme which foreran the introduction of Real Time Information from April 2013. By doing so, lessons from businesses experiences of reporting more regularly (though not quarterly) and using software can be learnt and acted upon before digital reporting becomes mandatory. Bi-annual reporting initially as part of the pilot programme would be a more realistic target.

The 2006 Carter Review5 advocated that any new systems developed should only be introduced after at least one years’ trial period. We advocate that this should equally apply to the proposals for MTD.

HMRC’s IT transition

HMRC is currently in the process of a major IT transition from its Aspire outsourcing contract to a new mix of in-house and external service providers. Timed with the MTD proposals, this raises concerns about whether HMRC’s systems will be able to cope with the inevitable scale of change MTD will require. This will include getting the MTD system up and running in parallel with the old self-assessment system for those not required to report more regularly.

Key recommendation

At a time of already great economic uncertainty for UK business, the common sense approach would be to take the decision to delay now and allow business, HMRC and software providers time to properly consider the scale and impact of the proposals and prepare and test the various systems extensively rather than pressing ahead to meet an unrealistic timetable and project which has already been beset by delays.

Given that the proposals will have the greatest impact on small business we would suggest that HMRC also reconsider making such businesses the first tranche mandated to file quarterly from April 2018. The timetable should re-examined and the move to digital phased in slowly, particularily for income tax. This could mean less financial support is needed by businesses if voluntary uptake is encouraged. Digital recording keeping should not be mandated from the outset.

We are in a “mid-digital” era, a period that straddles the age where digital is just becoming accepted into the mainstream, and the age where digital is fully immersed into our society. Mandation should not be the first step in a project to make tax digital. There should be an extensive phase-in period on a voluntary basis to assess the true appetite for digital and iron out any issues. Moving from one annual return of information to, in some cases 16, in just one tax year is just unrealistic.

Freedom of Information

We note the scope of the Freedom of Information Act with regards to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website in due course and will be available to all of our members and the general public.

Source: Chartered Accountants Ireland, www.charteredaccountants.ie